The aviation regulator needs a complete revamp

In a freewheeling interview, Amber Dubey, Partner and India Head of Aerospace and Defence, KPMG, says that the proposed Civil Aviation Authority (CAA) cannot just be a rehashed version of the Directorate General of Civil Aviation.

The government is set to spend $10 billion to develop airport infrastructure over the next five years. This will mean the optimisation of nearly 400 unused airstrips across India that will be revived. How do you expect industry to react to this investment flow into the sector?
The decision of the Government of India to spend $10 billion towards airport infrastructure development is a critical move. India is one the few nations in the globe which has recorded a year-on-year passenger growth of nearly 23 per cent. India aims to become the third-largest aviation market by 2020 and the largest in the globe by 2030; this can realistically be achieved when the nation strengthens the existing airport infrastructure.

With barely 99 million domestic tickets sold in calendar year 2016, in a nation of 1.3 billion people, India remains one of the most underpenetrated markets in the world. Therein lies the opportunity. Most airlines see that and that reflects in the large orders that have been placed for deliveries spread out over the next decade or more.

The number of passengers flying by air in India has surpassed the number of passengers travelling in air-conditioned coaches of Indian Railways. This is historic. Apart from the passenger traffic growth between major metros, there is a substantial increase of air passengers between Tier-II and Tier-III cities, and metros. Several carriers are now adding new routes to connect Tier-II/Tier-III towns with major metros through smaller aircraft. The Regional Connectivity Scheme (RCS) under the aegis of the National Civil Aviation Policy (NCAP 2016) will push the growth momentum harder by taking flying to the masses and bringing unserved cities into the national air grid.

Major airports like Delhi, Mumbai, Kolkata and Chennai are severely congested during peak operational time. The revival of unused airstrips will also help carriers to facilitate passengers to connect directly between metros and towns.

Revival of unused airstrips will also trigger new investment opportunities. Setting up of new industries and establishment of commercial hubs around airports indirectly supports the local economy.

The amount of $10 billion is a sizeable chunk of money. There are various airports in India which do not receive any commercial flights despite large expenditures incurred, perhaps due to political or other non-commercial considerations. The government therefore has to be judicious in identifying the high potential airstrips to be developed and run them on no-frills or low-frills mode, depending on the business case.

Industry body FICCI and KPMG had recently studied the 414 regional airports and identified 44 high potential ones among them.

The federal government announced the New Civil Aviation Policy (NCAP) in 2016. Its critics have, however, alleged that fundamental issues such as strengthening and restructuring of the Directorate General of Civil Aviation (DGCA) and Bureau of Civil Aviation Security (BCAS), and developing a viable business plan for Air-India and the Airports Authority of India (AAI) have been ignored. What is your take on the subject?
NCAP 2016 is a catalyst to support the existing aviation sector in India. This is the first time since Independence that an integrated aviation policy covering over 22 aspects of aviation has been created after extensive interaction between the government, regulators, industry and other stakeholders. The policy also comes at a critical point when the aviation sector in India is growing at a stupendous rate. The vision of the policy is to create a conducive ecosystem of aviation and make flying affordable.

NCAP 2016 has made the aviation sector in India competitive for various players including air carriers. One of the main highlights of NCAP 2016 is the Regional Connectivity Scheme (RCS) which aims to make flying affordable and connect un-served and underserved airports through Viability Gap Funding (VGF). It has also created a level playing field for the new entrants in this sector. Anti-competition rules such as 5/20 have been modified to increase competition among carriers and indirectly benefit air passengers through reduction of fares and better connectivity, etc. The policy has also strengthened the technological aspects in the aviation sector, especially through GAGAN, which can ease air traffic bottlenecks and help solve other operational issues. For instance, GAGAN can ensure that as many as 50 aircraft can safely operate in a common airspace that currently allows only two planes. This can resolve congestion problems at our major airports.

Notable omissions include a roadmap for a complete revamp and transformation of the Directorate General of Civil Aviation (DGCA) into an independent Civil Aviation Authority (CAA), listing of AAI and Pawan Hans, hiving off and corporatisation of Air Navigation Services (ANS), strengthening of the Bureau of Civil Aviation Security (BCAS) and privatisation of Air-India. Since most of these are government-controlled entities, one believes necessary reforms will be brought in gradually outside the NCAP 2016.

The UDAN scheme that stipulates Rs 2,500 for an hour-long flight for better regional connectivity is delayed. Is it viable, given the negative financials of airlines in general?
The UDAN scheme gives wings to the common man who has never experienced the joys and time benefit of flying before. It will be a catalyst for the development of economic growth in the interiors of India. Experience shows that not many big-ticket investors, especially foreign, are interested in areas that are located three to five hours from the nearest airport. UDAN aims at funding the regional flights through charging a small levy on passengers flying and paying a direct subsidy per seat to the operator, in addition to various concessions in taxes, airport charges and levies. UDAN would also provide a passenger boost to scheduled operators. For instance, a passenger intending to fly from Kadapa to Delhi, can opt for an UDAN flight between Kadapa and Visakhapatnam and thereafter fly by a large airline to reach Delhi. FICCI and KPMG have prepared financial models for four aircraft types: 9, 19, 48 and 78-seater. UDAN is definitely viable provided the routes, aircraft, staff and operating model are chosen carefully.

Is India ready to think and execute ´futuristic airports´ with future-proofed aviation management and operations at par with global standards?
India is poised to become the global aviation giant and is heading in the right direction. The policy changes by the Ministry of Civil Aviation and rapid implementation of advanced technologies for air traffic management, airport and airline operations has put forth India as a leading change agent in the aviation space. Since we have traditionally lagged behind the world in adoption of the latest aviation technologies, this is a golden chance for India to leapfrog the tech divide.

With the implementation of GAGAN and Centrally-controlled Air Traffic Flow Management (C-AFTM) system, the air traffic congestion at major airports is likely to be reduced significantly. This will be the same case for passenger services like e-enabled paperless airport entry, check-in, baggage drop, retail transactions and aircraft boarding, with the use of biometrics and digital technologies.

Kochi Airport is the first airport in the globe which completely operates on solar power. This is a landmark event for Indian aviation and more and more airports are following Kochi´s example.

Indian airports have been recognised globally for their service standards, Delhi´s Indira Gandhi International Airport (IGIA) has been named as the world´s number 1 position for the second consecutive year in the 25-40 Million Passengers Per Annum (MPPA) category. GMR´s Rajiv Gandhi International Airport (RGIA), Hyderabad, has featured among the world´s Top 3 Airports for the seventh year in a row in ACI ASQ ranking. Airports Council International (ACI), declared Hyderabad Airport ù operated and managed by GMR Hyderabad International Airport (GHIAL) ù as the 3rd Best Airport in the world, in the 5-15 Million Passengers Per Annum category. ASQ is the world´s most renowned and premier passenger service benchmarking programme for airports globally.

These are fantastic achievements. But we can´t rest easy. There are miles to go.

With the Indian aviation sector having undergone a long spell of profitless growth, the emphasis by passenger airlines to go in for large scale aircraft purchases may likely have an adverse impact on their viability. Your thoughts on the subject?
The sharp depletion in global fuel prices has significantly helped airlines to reduce operational expenses. However, jet fuel prices in India are a whopping 60-70 per cent higher than the global prices and account for almost 40-50 per cent of the operating costs of Indian carriers. Other non-fuel costs like aircraft leasing, wages, airport charges, spares & maintenance and overheads are also on the rise. Airfares are declining due to heavy competition. With margins getting squeezed, the only way to enhance profits is by enhancing capacity and taking flying to the huge number of non-flyers in the country.

This is why most airlines are placing large orders. Large orders also help in bringing down the unit cost per seat and allow airlines to make a small profit under the sale and lease back (SLB) model. The aircraft deliveries take place in a phased manner over a period of time, to support the network expansion plans as well as replace the older aircraft in the fleet.

Does the country´s civil aviation sector need a regulator?
A civil aviation regulator is highly necessary for a rapid developing economy like India. The existing safety regulator, Directorate General of Civil Aviation (DGCA), is the regulatory body under the Ministry of Civil Aviation. Security is regulated by BCAS and airport tariffs by AERA.

It is envisaged that a new body, Civil Aviation Authority (CAA), will replace the DGCA in the next few years. It requires a complete revamp of DGCA from top down. Many industry players complain that DGCA´s practices are outdated, overbearing and arrogant, especially at lower levels. MoCA´s initiative to make the most of DGCA´s activities online has not succeeded due to internal resistance and technical reasons. One hopes that the current leadership at MoCA takes up DGCA´s revamp on a war footing. DGCA needs to be led by an aviation specialist with high integrity and impeccable credentials, with due independence and a fixed tenure of at least five years. The last six heads of DGCA have been bureaucrats with extremely short tenures; that sends out very wrong signals to the industry and the global community.

Stalled implementation of the Cape Town Convention in the Indian civil aviation code, despite India being a signatory to the agreement, could impact the country´s risk rating. What is the way forward?
The Cape Town Convention (CTC) was ratified by India but still hasn´t been incorporated in Indian legislation. This leads to higher country risk and leasing charges for all Indian carriers. This will especially hurt smaller operators in the UDAN scheme who have a smaller capital base and a small fleet.

KPMG had urged MoCA to consider allowing foreign registered aircraft for UDAN operations, which has been accepted and a draft Civil Aviation Requirement (CAR) has been issued by DGCA. This will help in faster evacuation of a leased aircraft from India when the lessor requires it. MoCA is also trying to reduce the amount taken to deregister a leased aircraft from several months to a few days. These are temporary solutions. We hope that the CTC is fully incorporated in Indian legislation at the earliest, given the huge requirement of aircraft in India, especially under UDAN.